Ethereum co-founder says crypto coin market is a time-bomb

Initial coin offerings, a means of crowdfunding for blockchain-technology companies, have caught so much attention that even the co-founder of the ethereum network, where many of these digital coins are built, says it’s time for things to cool down in a big way.

“People say ICOs are great for ethereum because, look at the price, but it’s a ticking time-bomb,” Charles Hoskinson, who helped develop ethereum, said in an interview. “There’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.”

Firms have raised $1.3 billion this year in digital coin sales, surpassing venture capital funding of blockchain companies and up more than six-fold from the total raised last year, according to Autonomous Research. Ether, the digital currency linked to the ethereum blockchain, surged from around $8 after its ICO at the start of the year to just under $400 last month. It’s since dropped by about 50%.

Hoskinson, who runs technology research firm IOHK, is part of a growing chorus of blockchain watchers voicing concern about the rapid surge in cryptocurrency prices and digital coin crowdsales that have collected millions of dollars in minutes. Regulation is the biggest risk to the sector, as it’s likely that the US Securities and Exchange Commission, which has remained on the sidelines, will step in to say that digital coins are securities, he said.

Startups raising money through ICOs usually skip the safeguards required in traditional securities sales, like making sure they’re dealing with accredited investors and verifying the source of funds. That could lead to lawsuits in the future, as digital coin buyers can sue the issuer claiming they didn’t know the risks of buying those assets, Hoskinson said.

Hoskinson joined the ethereum founding team in late 2013 and left in June 2014 as he advocated for a for-profit entity while others in the team led by Vitalik Buterin wanted to keep it as not-for-profit.

Ripple Chief Executive Officer Brad Garlinghouse had a similar view regarding regulatory risks. Teams listing companies offshore and selling their coins to investors outside the US are naïve to think there are no investor protection laws elsewhere, and also expects that the SEC will eventually say cryptocurrencies are securities, he said in an interview last week.

Ripple is a money-transfer company based on the blockchain technology, that’s tied to the third-largest cryptocurrency by market value.

“ICOs operating in the Wild West of finance isn’t sustainable,” Garlinghouse said. “If it talks like a duck and walks like a duck, the SEC will say it’s a duck.”

Besides the growing concern about an ICO bubble and regulatory concerns, ether trading outages stemming from the jump in transactions, companies cashing in on the money raised in crowdsales, yesterday’s $7 million CoinDash hack and even false rumors that Buterin had died, have all contributed to the tumble in the price of ether. Concern about bitcoin potentially splitting in two is also sending jitters throughout the crypto world.

Still, like Ripple’s Garlinghouse, Hoskinson thinks once the currency ICO bubble deflates, cryptocurrencies will continue to be an avenue for companies to raise money, but it will be done in a regulated and more constrained environment.

“Regardless of regulation ICOs are here to stay,” he said. “After it collapses they’re going to pick up the pieces and say how do we do things differently.”

COMMENTS 4

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I understand the benefits offered by cryptocurrencies. The anonymity, ease of payment and “limited supply” of bitcoin gives it value. Cryptocurrencies are truly “free money” and should be allowed to flourish and should be used by everybody.

My problem is this- in every country the Reserve Bank has a legal monopoly to issue money. A Fiat currency has value because the use is enforced by the court, police or army. The USA has proved that it is willing and able to enforce the use of the dollar (petro-dollar wars). There is no way governments will surrender their monopoly on the issuance of money. If they do, they also surrender their power to devalue the currency for tax benefits and to save the banking system from implosion.

While cryptocurrencies are a novelty, and the use is limited to a few investors, governments will allow it. The moment people prefer cryptocurrencies to the national currency, the court, police, army, drones, theft, cyber-crime and sabotage will be deployed to destroy the competition.

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Varied use: the underlying blockchains are already being used (by the vast majority of fortune 500 companies) for multiple other applications than currency i.e. blockchain isn’t going anywhere – it’s the equivalent of a governemnt trying to shut down the internet (possible but difficult)

Regarding currencies: China & Russia are both in the process of digitalising their national currencies, so the US don’t really have a choice but to compete or go to war. History suggests the former (compete) is far more lucrative and in this regard it’s reasonable to expect that governments will regulate in the blockchains (and currencies) that benefit them, and regulate out the currencies that don’t benefit them. Gov regulation may cause large prices drops for currencies which don’t bend to their regulation but there are more than enough ‘investors’ who don’t use cryptocurrencies for a store of value i.e. as long as the internet exists, crypto currencies will exist (they may drop in price but it’s mathematically implausible to make them go away).

Finally, don’t forget that cryptocurrencies circumvent national policy & regulation, so what the US decides is simply irrelevant to a US citizen as they have the ability to have a digital presence in another country (i.e. as long as they don’t want to withdraw to US dollars, the US rules don’t apply). Governments may look to create global legislation but we all know how well different countries cooperate.

For those ahead of the curve you will already know that the currency application is an overly simplified iteration of blockchain and, while necessary, still a less important ‘distraction’ from the real application: enforcing trust (many people lack the imagination to appreciate the implications); the most notable current application of which is to enforce geopolitical systems; blockchain secures a set of rules (a ‘way of doing things’ i.e. culture).

It will take time (and a rocky road – with some dotcom crashes) to come to fruition. but 10 years is too long for blockchains to run most processes that are inefficient due to requirement of trust (use your imagination to consider what this may apply to in our everyday lives).

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Now I’m no expert, nor do I have to be, but logically, practically and historically, when doing business, NOBODY would give you anything for nothing or for fresh air! Some form of back up ALWAYS had/has to be in place. such as Gold, Platinum, Silver, Diamonds, Real estate, you name it, etc. Something solid of equal value must be in place to back any offered currency, material or service, etc.). You may ask what about a country over printing currency? Any country printing money, without Bullion or a universal accepted commodity back up, is regarded as HIGH risk and with suspicion. Even though you have such country to hold accountable (them not wanting to lose face with the world and world banks) one still stand a better chance of recovering whatever you have put in.
Cripto money is Bulldust (note the dust of Bull.. is also worth more than Cripto money). One can be certain Cripto money will have no happy ending.
Ps. people just about always lose their direction in a stampede irrespective if you’re a top institution, rocket scientist or banker. They all show the same pasterns as we see with Cripto and some other cases.
Lastly, to start making money from a NIL venture clever people with money will start it of, get it to stampede, then quickly take their profits and run.